Who Failed Silicon Valley Bank Depositors?

Well.

Yeah.

So, the California Department of Financial Protection and Innovation closed Silicon Valley Bank (SVB) Friday and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. Silicon Valley Bank was a $200 billion bank with over $170 billion in total deposits.

This is the biggest U.S. bank failure since Washington Mutual Bank in 2008 whose assets were eventually mostly sold to JPMorgan Chase after the FDIC took it over.

The FDIC said in its SVB press release that depositors will have full access to their insured funds by Monday morning – insured funds being the first $250,000 in a depositor's account. Everything in excess of that $250,000 will become available to customers as the bank’s assets are sold off to other banks and financial institutions.

If you’re thinking: “Hold on a second, SVB was a $200 billion bank. Surely it has relatively big companies as depositors who have more than $250,000 deposited with them,” then I applaud you because, yes, they do.

Of course they do.

There’s a lot to unpack here and the full story is far from even beginning, but going into the weekend there is one important thing we should think about and make abundantly clear.

Who is to blame here?

Read more: A Tale of 2 Banks: Why Silvergate and Silicon Valley Bank Collapsed

I have fingers to point, so where should I point them?

Right off the bat, here’s who is not to blame: the depositors.

You will undoubtedly read suggestions that SVB failed because it was the bank of choice for VC-backed Silicon Valley technology businesses, many of which are questionably capitalized and horribly unprofitable (you know, the company that’s like “Uber for your Salesforce” or whatever).

Yes, SVB was tech-forward and, while not necessarily “crypto-friendly,” it did bank crypto hedge funds and VCs like Blockchain Capital, Castle Island Ventures, Dragonfly and Pantera (oh, and even CoinDesk). SVB didn’t fail because of any of these businesses. Even though it might make sense to be critical of depositor concentration in most cases, that doesn’t apply here.

If you’re inclined to point at VCs, maybe point at Peter Thiel-founded Founders Fund, which advised companies to “pull money from SVB amid concerns about its financial stability.”

In doing so, it managed to stoke fear among investors and sparked a good old-fashioned bank run, just as mean old Mr. Potter did to the Bailey Building and Loan in "It’s a Wonderful Life."

Sure, the SVB bank run only happened because depositors asked for their money back, but I’m hesitant to point at the depositors. After all, they didn’t have a passionate George Bailey (played by wholesome everyman Jimmy Stewart) imploring them to reconsider for the good of their fellow investors.

Of course, Founders Fund isn’t exactly Old Man Potter. It didn’t wake up and decide it wanted to tank SVB (and the idea that VCs intentionally tanked SVB to encourage the use of the fintech companies they own is a little far-fetched, even for me). Founders Fund was worried about something. What it was worried about was SVB’s failed capital raise, which somehow only happened in the last 36 hours or so.

SVB was running into some issues with its liquidity. If that means nothing to you, here’s the short: Customers deposit money into SVB, SVB takes that money and invests it in Treasurys, those Treasurys change in value depending on market conditions, the Treasurys SVB bought were long-dated so they were falling in value, the fall in value is precarious for the financial position of SVB.

(You can read a longer explanation of this from Bloomberg’s Matt Levine.)

From that crude explanation you should have one takeaway: SVB bought Treasurys that lost value as the U.S. Federal Reserve increased interest rates. That would normally be fine and dandy unless a bunch of depositors want their money back at the same time.

Which, as we laid out above, is what happened.

As you go into the weekend, know that smart people, or those who know jargon or read this column, will call SVB’s experience with the declining value of their Treasurys “duration risk.”

Point them at SVB and the Federal Reserve. Seriously.

If you’re hesitant to point fingers at depositors or the VCs that egged on the bank run, I don’t blame you. You could instead look at SVB and the Fed.

First and foremost, there was mismanagement of risk by SVB, which very clearly bought the wrong financial instruments with deposits. If it hadn’t, it wouldn’t have been raising capital.

But in defense of SVB (a very flimsy defense, to be sure) the Fed has raised interest rates by a multiple of almost 20 in the space of about a year. So while SVB made some bad bets, the responsibility for those bad bets should also sit with the Fed for raising interest rates so quickly.

How ironic: While trying to do something about high inflation, the Fed instead inadvertently started tanking banks that are invested heavily in Treasurys.

Lastly, and I will repeat this to make it as clear as possible, this is not crypto’s fault.

It’s not crypto’s fault because the collapse of SVB would have happened no matter what the bank’s depositor mix was. The risk management decisions SVB made with customer deposits were made without consideration for what the depositors were in the business of doing. It’s not crypto’s fault just like it’s not any other industry’s fault.

Except, of course, the banking industry’s.